SEC Chairman Jay Clayton, speaking at the Practising Law Institute’s annual conference on securities regulation, reviewed the SEC’s short-term and long-term agendas, the shareholder proposal process, and transparency as it relates to enforcement matters. With respect to the proxy process, Clayton said he would like to reopen the comment file on the 2010 "proxy plumbing" project and consider areas for improvement.
Proxy process. Shareholder engagement and the proxy process are not on the near-term agenda, according to Clayton, although he believes it is time to take a hard look at voting, costs, and burdens and the impact on the ultimate beneficial owners of public companies, the majority of which are "silent" retail investors. Clayton expressed concern about whether the views of long-term retail investors are underrepresented or selectively represented in corporate governance. He explained that a majority of investment dollars are in vehicles in which the person with the money at risk is not the voting shareholder. He raised the question of whether voting decisions are maximizing funds’ values for those shareholders.
With respect to shareholder proposals, Clayton said he is looking for ways to reconcile diverse and deeply held views. He said his guiding principle in answering such questions is the appropriate level of ownership for submitting proposals or the appropriate threshold for resubmissions is whether the rules serve the long-term interests of Main Street investors. Those investors must have a seat at the table as the SEC examines the proxy process, he said.
SEC’s agenda. Clayton noted that under the Regulatory Flexibility Act, the SEC’s near-term agenda has grown longer over the years. If all of the items on the near-term agenda were to continue through to adoption, he said the process would take years. The next near-term agenda will be shorter than in the past, he advised. Clayton added that he was not criticizing previous Commission chairs, given the unprecedented number of mandates to which they were subject. He also emphasized that the Commission’s work is not slowing down. The agenda will reflect rules for which there is a reasonable expectation of completion in the coming year, he explained.
The SEC has already made progress on many of its near-term projects, according to Clayton, including the completion of two rulemakings. The SEC also took care to reserve capacity to react to major events, such as the relief that was provided in the wake of Hurricanes Harvey, Irma, and Maria. He also cited the interpretive guidance to help companies comply with the pay ratio rule, a staff bulletin on shareholder proposals, and three related no-action letters to provide more certainty to market participants as they begin to comply with the European Union’s Markets in Financial Instruments Directive, known as MiFID II. Clayton predicted that the impact of MiFID II on the markets has been underestimated and that it will have a greater ripple effect than expected.
The SEC will also apply a streamlined approach to its longer-term agenda. Clayton said the mandated Dodd-Frank rulemakings are priorities and he has discussed with Commissioners Michael Piwowar and Kara Stein their key interests and how to achieve them. He added that he will engage with new Commissioners Hester Peirce and Robert Jackson once they are on board to determine their areas of greatest interest.
Enforcement initiatives. In the area of enforcement, Clayton is looking for opportunities to deter, mitigate, or eliminate wrongdoing before an enforcement action becomes necessary. He said a common theme in the SEC’s enforcement actions is the lack of transparency, so one approach is to eliminate the type of opacity that can create an environment that is conducive to misconduct.
Fees. He pointed, for example to complex, obscure, or hidden fees and expenses. While he expects the enforcement staff to pursue cases where hidden or inappropriate fees are used, he also wants to explore ways to clarify fee disclosures in order to deter and reduce opportunities for misconduct.
Penny stocks. Another area with a conspicuous lack of transparency is penny stocks. In addition to disclosure deficiencies, Clayton said many penny stocks may have inadequate custody arrangements. The SEC will continue to pursue bad actors in the penny stock market but will also examine ways to bring more transparency to this market.
Transfer agents. The SEC will continue to monitor transfer agents to ensure that they are not disregarding red flags relating to the removal of restrictive legends. The need to prevent unregistered securities distributions is particularly acute in the microcap market where many of the disclosure requirements do not apply. Clayton urged transfer agents to be diligent.
Initial coin offerings. He also highlighted initial coin offerings where many online platforms that list and trade virtual coins or tokens lack information, making them susceptible to price manipulation and other fraudulent trading practices. The SEC has issued an alert to advise investors that initial coin offerings may be securities and those who offer and sell them may have to comply with the federal securities laws. Clayton said the SEC will continue to seek clarity for investors on how tokens are listed, the standards for listing, how the tokens are valued, and what protections are in place for market integrity and investor protection.
Bad actor database. Clayton announced that the SEC is creating a website with a searchable database that will include the names of individuals who have been barred or suspended as a result of securities law violations. The SEC encourages investors to ask questions and to conduct background checks before investing with a financial professional. The new website should assist investors in those efforts.
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